Sunday, March 04, 2007

A private matter

My friend and former co-worker Bill Steigerwald extolls the virtues of highway privatization in his column in today's Pittsburgh Tribune-Review. For the purposes of this discussion, I'll take Bill's word for it that highway privatization has worked as well as its advocates claim. I'll add that philosophically, I have no problem with privatization of government services, and I definitely think it's option we should consider.

I do, however, think it is wrong to believe that privatization is a panacea for all the problems that state, local and the federal governments face. Let's consider, for a moment, the logic behind privatization: Private firms are better able than governments to deliver public services because free market competition forces companies that want to survive and prosper to provide goods and services with maximum efficiency at the lowest cost. Government, on the other hand, faces no competition, and while elected officials are answerable to the public, the bureaucrats who administer government services are not, and they are often protected by work rules over which elected officials have limited control.

Now, let's look at the some of the flaws in that logic. First of all, private enterprises, like governments, are composed of human beings who make mistakes, who fail, and who do bad things deliberately. History of full of companies that have made disastrous mistakes. It's why companies go bankrupt. It's why they fail.

The problem is that the consequences of those mistakes can be deferred for years. Enron, for example, was playing games with its books long before anyone noticed. Even after business school students and a few enterprise reporters began to spot the cracks in the energy giant's foundations, Enron's failures continued to escape widespread public attention until the company was on the verge of collapse.

Second, the free market system doesn't really reward companies for providing excellent goods and services; it rewards them for being profitable. Companies can increase profits in any number of ways without improving customer satisfaction. They can produce cheap products. They can cut back on safety measures. They can employ off-the-books workers and not pay taxes on them. In some cases, these practices can catch up to them. But again, it may take years, and in the meantime, people may be hurt or die.

There's a dangerous corollary to the aforementioned idea: Companies can stay in business for years without being profitable as long as they can appear to be profitable. Enron is again a good example, but there are plenty of others. (If you want an example close to home, think Phar-Mor.) People invested in Enron, and continued to do business with the company, long after they should have, because on paper the company appeared to be thriving.

Third, social conditions that have hobbled governments in providing quality services are still going to exist no matter who provides them. I'm thinking here of education. The president can talk all he wants about the "soft bigotry of low expectations", but the bottom line is that academic achievement correlates strongly with family income: Students from wealthier families perform better in school than those from poor families. This doesn't mean poor people are stupid; it does mean that children of affluent families come to school with several advantages over their low-income peers. Some public and private schools have overcome the disadvantages posed by poverty, but those disadvantages are real and will not go away just because you give people vouchers for their kids to attend private schools. (And I happen to be in favor of school vouchers for low-income families.)

Finally, there is no guarantee that privatization will increase accountability. It may even dilute it. What you are doing by outsourcing services to private companies is adding another layer of bureaucracy between the constituents who receive those services, and the elected officials who are ultimately accountable to those constituents. And that extra layer is one that is not subject to many of the laws that require government business to be conducted in the public eye.

None of this is to say that we should not bother outsourcing government functions, and selling some government assets, to private concerns. But we have to consider that we might be trading one set of problems for another.